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Random Thoughts on Obama’s New Mortgage Plan

In case you missed it, President Obama gave a big speech out in Las Vegas about both his “jobs” plan and a new plan to help underwater borrowers re-finance their mortgage.

First, let’s recognize that it is not really “his” plan. The proposal is being issued by the Federal Housing Finance Agency (FHFA), an independent regulator that the President is supposed to have no control over. Frankly, I find it troubling for a president to be so involved with an independent agency. If a president was out giving speeches when the Federal Reserve changed interest rates, we would all call that bizarre. It is no different here. As someone involved in drafting the law that created FHFA, I can say Congress considered, and rejected, the option of having this agency accountable to the president.

On to the substance. Perhaps most striking is that this plan does nothing for the housing market. Does it increase demand for housing? No. Does it reduce the supply of excess homes or help move the massive shadow inventory? Again, No. Does it even help those most in need? No. It is available only to those who have already had a mortgage for over two years, are current on their mortgage, and have missed no more than one payment per year. Basically helping only those that do not need any help.

The logic of the plan is that by reducing mortgage rates, you reduce monthly payments, which would increase consumer spending. The flaw in that logic is that while a mortgage is one person’s liability, it is another person’s asset. So you are simply making one party wealthier while making another poorer. It is not clear that the impact on aggregate spending should be anything other than zero.

Most troubling about the the plan, is that the program it is based upon, HARP, is likely illegal. Both the Fannie and Freddie charters require that if a loan is above 80 percent loan-to-value, it must have mortgage insurance. Yet the heart of HARP is a waiver of this requirement. Apparently FHFA claims these are not “new” loans, but just modifications. In that case why in the world would you modify a loan that is current and does not appear in any danger of default. Sadly one of the many things lost in the financial crisis is a basic respect for the rule of law. Our financial regulators have too often embraced a culture of lawlessness in name of saving our financial system (with little to show for it).

(See here for more on why the federal government shouldn’t be involved in housing.)